CFTC panel to weigh new customer fund safeguards

CFTC deceived by paper submissions from Peregrine

July 26, 2012|Reuters

The receiver in the Peregrine Financial bankruptcy is setting about finding and selling assets of the failed brokerage, including its Cedar Rapids, Iowa, headquarters, built for $18 million. (Matthew Putney/Waterloo Courier)

A commissioner charged with improving technology at the U.S. futures regulator plans to tell industry players that immediate action is needed to protect customer funds at an emergency advisory committee meeting on Thursday.

Weeks after the revelation of a $200 million shortfall in customer money at collapsed brokerage Peregrine Financial Group, an industry panel created by the Commodity Futures Trading Commission will explore possible reforms, like giving regulators direct electronic access to customer accounts.

The meeting was called days after the July collapse of PFGBest, as Peregrine is known, which drew instant comparisons to bankrupt brokerage MF Global Inc. That firm exploded in October, leaving a $1.6 billion hole in client funds.

"The actions taken by the two firms are a complete and total betrayal of the public trust," Scott O'Malia, a CFTC commissioner and chairman of the technology advisory committee, plans to tell the panel. "An immediate and comprehensive overhaul of customer protection safeguards is required."

The committee's technology focus goes to the heart of the alleged PFGBest fraud, which relied on paper submissions of bank balances.

The firm's founder and chief executive, Russell Wasendorf Sr., attempted suicide earlier this month and left a signed note describing how he bilked customers of more than $100 million over a nearly 20-year period, partly by forging bank statements.

Wasendorf's admission detailed how he used little more than a rented post office box, Photoshop software and inkjet printers to dupe regulators by intercepting bank confirmation requests in the mail and forging the documents to conceal missing money.

"It is imperative for the industry to develop a technology solution that can verify customer balances," O'Malia plans to say.

Panel members will outline proposals to boost customer safeguards that have been floated by different organizations in recent days, according to O'Malia.

The CME Group Inc, the biggest operator of U.S. futures exchanges, wants all customer money to be held at clearinghouses or other depositories in order to keep it out of the hands of brokers where it might be misused.

CFTC Chairman Gary Gensler has called for a system that would allow both customers and regulators direct electronic access to account balances. He has also proposed incorporating new rules approved for the National Futures Association, which regulated PFGBest, into the commission's own rule book, so it can directly enforce them.

One of these rules, named for MF Global's former CEO, Jon Corzine, would require top executives at futures brokers to sign off on major withdrawals from customer accounts.